Archive for October, 2008

Election and jobs to set tone for stocks (Reuters)

Friday, October 31st, 2008 | Finance News

NEW YORK (Reuters) –
Wall Street hopes to turn a new page as it heads into November, but next week is littered with hurdles ranging from the U.S. presidential election to a likely gloomy jobs report.

Traders were more than happy to see the back of October, one of the worst months in history for the broader market, and took heart from the fact that it ended with one of the best weeks on record.

This week's strength came as the host of efforts by central banks and governments to ease credit strains began to bear fruit, and volatility abated slightly. Bargain hunting and funds buying stocks to rebalance their portfolios also helped boost stocks.

For the first part of next week, Wall Street -- like the rest of America -- will turn its attention to Tuesday's presidential election.

Democrat Barack Obama's lead over Republican rival John McCain held steady at 7 points as the race for the White House entered its final four days, according to a Reuters/C-Span/Zogby tracking poll released on Friday.

Investors will likely assess the possibility of quick fiscal stimulus after the election and the risk of protectionist measures or more regulation.

Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois, said as long as the election was decisive, stock markets will likely react positively, regardless who wins.

Thomson Reuters data shows that on average the 60 days preceding a new presidential term yield positive returns, suggesting that the lack of uncertainty after elections usually gives the market a boost.

"Once we know what the balance of power will look like, investors can factor that into the equation. The market may not like who wins, but it will like knowing," said Christopher Zook, chairman and chief investment officer of CAZ Investments in Houston.

But a raft of economic data will be vying for investors' attention, as will earnings reports in the last heavy week of the autumn results season.

Fred Dickson, chief market strategist at Davidson Companies in Lake Oswego, Oregon, said he expects the economic data "won't make very good reading as the news coming from companies who have already reported third-quarter earnings continues to point to an economy that has come to an abrupt stop, primarily as a result of the credit crisis."

HUGE JOB LOSSES FORESEEN

In the week ahead, the main event on the economic calendar is the October U.S. employment report. That data, due on Friday, is expected to show that U.S. nonfarm payrolls shed 200,000 jobs in October, according to a Reuters poll, while the unemployment rate is forecast to rise 6.3 percent.

Other key economic reports include the Institute for Supply Management (ISM) reports on manufacturing on Monday and non-manufacturing, or service-sector, activity on Wednesday. Both are expected to produce readings showing that the economy contracted in October.

Among the major companies set to report earnings next week are Anadarko Petroleum (APC.N), MasterCard (MA.N), Cisco Systems (CSCO.O) and Sprint Nextel (S.N).

With 59 percent of S&P 500 companies having reported earnings in the third quarter, on average earnings for companies in the index are expected to fall 23.8 percent for the quarter.

Any further easing in credit strains, however, could help the market look past weak economic and earnings data, analysts said.

"Volatility will likely continue, though maybe not to the extremes we have seen," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

"You have some stabilization in the credit markets, but there is also still a lot of ugly economic news that is washing up on to the shore, so there is still that to and fro," he added.

On Friday, short-term credit markets showed more signs of emerging from a deep freeze as banks again lowered the rates they charge each other for borrowing dollars overnight and central banks across the world made the currency more easily available.

Meanwhile, the Federal Reserve's efforts to shore up short-term lending for companies and banks continued to build momentum in the critical commercial paper market with a program the U.S. central bank launched this week.

"I think we probably have passed the worst as far as credit market lock-up and the ending of the world as we know it," Hinsdale Associates' Nolte said.

That said, "I don't think we're completely out of the woods yet," he added.

TRICKS AND A HALLOWEEN TREAT

October was a nightmare for U.S. stock investors, with the Dow Jones industrial average (.DJI) ending the month down 14.06 percent -- its worst monthly percentage drop since August 1998. The Standard & Poor's 500 Index (.SPX) slid 16.83 percent this month for its worst one-month percentage slide since October 1987. The Nasdaq lost 17.73 percent in October, its worst one-month percentage loss since February 2001.

For the week, though, Wall Street wrapped up a rotten month with a Halloween treat. Stocks ended Friday's session higher, following Thursday's advance a day after the Fed's half-percentage-point rate cut. This performance gave the U.S. stock market its first back-to-back gains in over a month.

The Dow finished the week up 11.3 percent, its best weekly percentage gain since October 1974, while the S&P 500 climbed 10.5 percent, its best weekly percentage gain since at least January 1980. The Nasdaq rose 10.9 percent, its best weekly percentage gain since April 2001.

A big bright spot: U.S. oil futures prices dropped a record 32.62 percent in October. On the New York Mercantile Exchange, U.S. front-month crude settled at $67.81 a barrel -- down $32.83 from its close on September 30.

(Wall St Week Ahead appears every week. Comments or questions on this column can be e-mailed to kristina.cooke@thomsonreuters.com)

(Reporting by Kristina Cooke, with additional reporting by Ryan Vlastelica and Leah Schnurr; Editing by Jan Paschal)

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Consumers slash spending, world markets stabilize (Reuters)

Friday, October 31st, 2008 | Finance News

NEW YORK (Reuters) –
Americans slashed spending and the country's business outlook weakened but there were signs of stabilization in global markets on Friday, with interbank rates falling and U.S. stocks posting their best week in 34 years.

But in a sign of the hurdles that lie ahead, the Bank of Japan slashed interest rates, British banking giant Barclays said it was raising $12 billion in capital and a top U.S. lawmaker demanded that banks use money from the country's $700 billion financial bailout package to boost lending.

How to shore up the decimated U.S. housing market, which stands at the root of the global credit crisis, again took center stage on the last Friday before Americans go to the polls to choose their next president.

A U.S. Commerce Department report showed consumers cut monthly spending for the first time in two years in September, evidently bracing for hard times as jobs continue to disappear and credit conditions tighten.

Another survey showed U.S. consumer confidence in October suffered its steepest monthly drop on record.

"Consumers reported the most dismal assessments of their current financial situation ever recorded," the Reuters/University of Michigan Surveys of Consumers said.

Other reports showed business activity fell in the U.S. Midwest and New York City.

But there was at least one hopeful sign, as the closely watched interbank lending rates fell, suggesting that the moves taken by central banks and others to remove blockages in the credit system were working to some extent.

That helped push U.S. stocks higher, with financial stocks leading a rally as investors picked up bargains following recent heavy losses. European shares reversed losses and followed Wall Street higher.

Nevertheless, the Dow Jones Industrial average in October had its worst one-month percentage drop since August 1998, while the dollar was on pace for its best month in more than 17 years.

The Bank of Japan cut interest rates for the first time in seven years on Friday in a move that followed a rate cut by the U.S. Federal Reserve on Wednesday. The European Central Bank and the Bank of England are expected to do the same next week.

In the euro zone, inflation fell to 3.2 percent year-on-year in October, data that was likely to ease any concerns at the ECB about rising prices.

A German government official told Reuters the economy contracted for a second consecutive quarter in the July-September period, putting it in recession.

JPMORGAN HALTS FORECLOSURES

The economy is dominating the final days of the U.S. presidential campaign, which pits Republican John McCain against Democrat Barack Obama on Tuesday.

When the winner takes office in January, he will face the daunting task of overcoming the worst financial crisis in 80 years and guiding a $700 billion bailout that includes $250 billion of cash injections for banks.

The powerful chairman of the U.S. House of Representatives Financial Services Committee, Rep. Barney Frank, said companies receiving public money under the plan must use it for lending or they will be violating the law.

And a labor union leader slammed U.S. Treasury Secretary Henry Paulson's handling of capital injections at worse terms than billionaire investor Warren Buffett got.

Friday brought the year's 17th bank failure, as U.S. regulators closed Florida-based Freedom Bank. Larger regional bank Fifth Third Bancorp agreed to assume Freedom's roughly $250 million of deposits.

Perhaps mindful of the growing political pressure on the U.S. banks, JPMorgan Chase & Co, the largest U.S. bank, said it would halt foreclosures for 90 days as it ramps up a program to make it easier for homeowners to modify their mortgages.

In the latest sign of the widening demands on the rescue program, the Treasury said it will soon allow privately held banks to apply for government capital injections.

FALLOUT SPREADS

Federal Reserve Chairman Ben Bernanke said U.S. backing for debt issued by mortgage finance firms Fannie Mae and Freddie Mac in their current form must remain firm.

Uncertainty over how the U.S. government might treat debt issued by the two government-sponsored-mortgage enterprises in the future has depressed investor appetite, keeping U.S. mortgage rates elevated.

Bernanke's speech coincided with a new report showing that nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth.

Meanwhile, fallout from the crunch continued to spread, with Barclays saying it planned to raise 7.3 billion pounds ($12.06 billion) in additional capital from outside investors, including Gulf states Qatar and Abu Dhabi.

Barclays had said earlier it wanted to raise capital but would raise it privately rather than take UK government cash, as rivals Royal Bank of Scotland, Lloyds and HBOS are doing.

Germany's Commerzbank is interested in a state capital injection, according to sources familiar with the situation.

Japan's two-largest banks, Mitsubishi UFJ Financial Group and Mizuho Financial Group, cut their earnings outlooks by more than half on Friday, hit by growing bad-loan costs and a plunging local stock market.

In the troubled U.S. auto sector, a deal to merge General Motors Corp and Chrysler LLC hit an impasse after the Bush administration ruled out funding for it, according to Reuters sources. In Japan, Nissan Motor and Suzuki Motor issued profit warnings.

CREDIT CRUNCH

While interbank rates fell, at the ECB, overnight deposits from banks hit a record high, suggesting banks still preferred to deposit money with the central bank rather than lend to each other.

The Bank of Japan cut its benchmark overnight call rate to 0.30 percent from 0.50 percent, a slightly smaller reduction than the quarter point many had expected.

The rate cut failed to reverse the rise in the low-yielding yen, which has soared on risk aversion.

Japan's Nikkei closed down 5 percent on disappointment at the size of the interest rate cut, while China's main stock index in October suffered its biggest monthly fall since 1994.

October also marked some of biggest monthly price falls for commodities and oil, piling pressure on many emerging market economies that depend on exports for much of their revenue.

Ratings agency Standard & Poor's cut Argentina's foreign currency rating deeper into junk territory, citing economic and political concerns and fiscal pressure.

(Reporting by Reuters bureaus worldwide; Editing by Leslie Adler)

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October auto sales may have hit two-decade low (Reuters)

Friday, October 31st, 2008 | Finance News

DETROIT (Reuters) –
U.S. auto sales are expected to plunge to the lowest levels of the year in October and possibly the slowest running rate in two decades, with no certainty of when consumer confidence will return.

The U.S. automakers, struggling to preserve their shrinking pools of cash as they fight for survival, are poised to post sales declines of up to 40 percent, with the overall market sagging potentially to levels not seen since the 1980s, when the United States had 60 million fewer residents.

General Motors Corp, Ford Motor Co and Chrysler LLC are expected to lead the U.S. sales declines, but all six of the top sellers -- including Toyota Motor Corp, Honda Motor Co Ltd and Nissan Motor Co Ltd -- were expected to report lower sales.

High gas prices blunted U.S. auto sales earlier in 2008, but the plunge in consumer confidence -- which hit the lowest level in the four decades as the Conference Board measured it -- has pushed out expectations for a recovery beyond next year.

U.S. October auto sales were "pretty much as advertised," Ford chief sales analyst George Pipas said on Friday, adding that the seasonally adjusted annual rate would likely be around 11 million to 12 million vehicles in October.

But Ford executives hope that government response to the credit crisis would improve the overall retail atmosphere.

"There is a lot of action being taken by the Federal government, by the Federal Reserve, and by the Congress and we are hopeful that will stimulate demand," said Mark Fields, Ford's president of the Americas.

In a bright spot, Ford is confident its retail share of the U.S. auto market in October will rise to the highest in two years.

Barclays Capital analyst Brian Johnson expects a 39 percent drop in sales for the Detroit-based automakers in October, which was marked by low consumer confidence and "particularly poor showroom traffic."

"We believe that the pressure on auto sales from limited credit availability is mounting," Johnson said, adding it appeared dealers were facing a 10 percent to 15 percent headwind from the tighter lending practices.

A BAD MONTH ... NOW A DEAL?

Overall, U.S. light vehicle sales were expected to be in a range of 11 million to 11.3 million vehicles, according to analysts and industry executives -- a sharp decline from 16.04 million last October and 12.5 million last month.

Overshadowing the U.S. sales figures, key early indicators that economists use to gauge consumer spending and the broad health of the U.S. economy, are the merger talks between GM and Chrysler parent Cerberus Capital Management, which could result in the sale of all or part of Chrysler to GM.

Automakers pushed in October to tell customers that financing was still available despite the credit market turmoil and, in some cases, put thousands of dollars on the hood of slower-selling models to try to clinch the sale.

Toyota, which led GM in the third quarter as the world's largest automaker by sales volume, offered zero percent financing across 11 models in an effort to boost demand. Toyota's U.S. sales were down 10 percent through September.

Nissan said on Friday it was offering interest free loans on five popular models, including Altima and Sentra sedans.

Nissan expects a boost in sales in November and December from the loan incentive, which runs through January 5.

Some dealers have said consumers were having a tough time closing new car deals because many lenders tightened their standards or had completely pulled out of the auto loans market.

GMAC, earlier this month, announced it would offer auto loans only to consumers who have high credit scores, a decision that is expected to hurt GM's sales further.

On an unadjusted basis, Edmunds.com expects GM sales to drop 40.7 percent, Chrysler to drop 38.1 percent and Ford to drop 34.7 percent. It expects a 29.2 percent drop at Nissan, a 17.2 percent slide at Honda and a 15.5 percent fall at Toyota.

"Looking ahead, November is traditionally one of the worst sales months of the year and December is usually one of the best," Edmunds.com executive director of industry analysis Jesse Toprak said.

"If the election and other variables don't have a significant impact on auto sales through December, we are looking at an annual total of about 13.6 million units."

(Editing by Patrick Fitzgibbons Editing by Andre Grenon)

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